Apple and Google face same problem

Commentary: Getting customers to pay for ‘free’ content is the challenge

SAN FRANCISCO (MarketWatch) — Apple Inc. and Google Inc. have both become Wall Street darlings for running highly profitable businesses, but whether either can break print content out of its ‘free’ logjam, a long-standing problem for the media business, is unclear.

The two companies — now fierce rivals in the mobile device arena — are at loggerheads again over their individual approaches to selling subscription services on their mobile platforms. But the biggest problem is one both share: being able to woo consumers who have become accustomed to getting content for free.

Apple
AAPL, +1.63%
unveiled its plan on Tuesday, a new subscription service that lets publishers charge for subscription-based content through apps sold over the company’s App Store. The service has generated controversy over Apple’s plans to take a 30% cut of any content purchased through these apps. It was also criticized for limits placed on publishers that make it more difficult to sell content for apps outside of the App Store. See Apple news on subscription model here.

On Wednesday, Google Inc.
GOOG, +1.66%
came in for the kill, with news of its own subscription service. The service — called Google One Pass — allows publishers more flexibility in how they sell their content for mobile device apps. Also, in a move likely to appeal to publishers chafing at Apple’s demands, Google will only take a 10% cut on subscriptions. See Google's subscription news here.

Yet both services face an uphill battle in getting consumers to shift to a pay model for content such as news, which they have been reading over the Internet for years now — free of charge. The higher the cost is for consumers, the bigger the risk both publishers and these rival app stores.

“Everyone is saying this is going to save the media without saying how it’s going to do that,” said Ron Adner, an associate professor of strategy and management at Dartmouth College’s Tuck School of Business. “ITunes was going to save the music industry and instead it shifted their model from an album model to a per song model. It’s decimated the industry.”

Adner doesn’t see the exact analogy here, but he added that publishers are panicking and moving too quickly.

Both Apple’s and Google’s offerings have a few positives, but at this point, it is unclear whether those positive are enough to get consumers pay premium prices for content.

Apple has an incredibly popular device in the iPad, one that consumers love to use for reading magazines, newspapers and watching video. It already is making deals with big-time publishers ranging from Condé Nast to News Corp.
NWS, +1.64%
, which owns MarketWatch, the publisher of this report.

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Will that vast consumer audience also want to pony up additional money for subscriptions to magazines, newspapers and the occasional book?

James McQuivey, a Forrester Research analyst, says yes, if the content is cheap enough. “Subscription content services are the lifeblood of the content economy,” McQuivey noted in his blog on Wednesday. McQuivey says a full 63% of the money consumers spend on content is through renewable subscriptions. “Most of that subscription revenue goes to pay-TV providers, but 17% of it goes to newspaper and magazine publishers.”

He said the economics are simple enough and that publishers need to keep their costs as low as possible to maintain an active base of subscriptions to keep their businesses viable. But he noted that content providers cannot really pass on Apple’s cost to their subscribers.

“What’s a content provider to do – pass the 30% tax on to all users to ensure that they don’t get killed by the uptake on Apple devices only to see subscriptions dwindle?,” McQuivey asks. “Or keep the price low across the board and desperately hope that no one takes advantage of the iPad app they spent months developing?”

So far, content owners haven’t seemed interested in keeping prices down. Even before Apple announced its plan, prices for many news products for the iPad were priced in the premium range. Time Warner Inc.’s
TWX, +0.72%
Time Magazine charges iPad readers pay up to $5 for each digital issue, while a subscription to a year of the print version costs just a little over 50 cents an issue.

In other words, Time has marked up the digital issue of its flagship magazine by ten-fold, despite not having to print and mail it — and that’s without Apple’s juicy cut.

And all this leaves aside the fact that iPad users could simply visit Time Magazine’s Web site through the browser on the device, and read the issue for nothing. And that’s been the same problem facing news publishers for the last decade, in terms of how to make money on a product that people have now become accustomed to getting for free.

So whether a publisher decides to deal with Apple’s high fees — or Google’s lower ones — the same problem remains. Getting consumers to crack open their wallets for any sort of news is going to be the real trick.

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